NEW REAL ESTATE TRENDS: GOOD NEWS, BAD EVENTS AND UGLY CONSEQUENCES

The Philippine economic boom have greatly benefited the real estate sector.

The Philippine economic boom have greatly benefited the real estate sector.

After the historic 7.8% 1st quarter growth and buoyed by the investment grade ratings and economic reforms, the Philippines is expected to surpass it in the 2nd quarter, said Senator Franklin Drilon. The Philippines also improved its global competitiveness ranking.

Drilon, who is the Chairman of the Senate Committee on Finance, said that the reforms being undertaken by the Aquino administration helped the economic growth, boost the stock market and improved the financial and economic indicators.

These economic improvements are a boost to the Philippines’ efforts to lure more investors to the country as shown by the opening of British automaker, Bentley in the country. Another British automaker, Rolls Royce, will follow suit. Japanese firms are keen on starting their investments in Manila and Cebu.

Karen Roa, president of Philam Asset Management Inc. said that “I think that’s very positive. That’s wonderful for the market, for the industry, for all the businesses. GDP is growing so you’ll see equity markets picking up. SDA (special deposit account) is also coming out so that will give a lot of opportunity to many of the product providers, investment providers to be able to develop more the capital markets and increase savings and investments for the retail investors.”

Fitch Ratings, which gave the Philippines its first investment grade, said that the country can absorb current market volatility and withstand the instability in financial markets.  This is because of the Philippines’ strong external finances, with the balance of payments (BoP) consistently posting a surplus.  The BoP shows a country’s transactions with the rest of the world. A surplus indicates that more funds flowed into an economy than out, providing a cushion against external shocks.

The country may also contain the impact of sell-off, which was triggered by signals that the US Federal Reserve could start tapering off its stimulus program. It is because emerging countries like the Philippines have “ample international reserves exist to meet portfolio outflows and to smooth excessive exchange rate volatility,” the IMF said.

The financial markets in the world were seen to be tumbling because of the anticipation of the rise of US Federal Reserve and this cause the PSE index to close at 6,242.26 last week and the peso falling to P43 = $1. But the BSP maintained that they enough tools to respond “flexibly” to any instability. BSP Governor Amanda Tetangco explained that the markets’ movements were part and parcel of a shift in the assessment of global risk.

The financial markets in the world were seen to be tumbling because of the

The financial markets in the world were seen to be tumbling because the US Federal Reserve will soon scale back its stimulus program.

Investors have started to pullout money from emerging countries like the Philippines mainly because they think that the US Federal Reserve could wind down its easy-money policy which has supported the economy and pushed funds into the financial system. They also feared that that the U.S. Federal Reserve will discontinue its quantitative easing (QE3) or bond-buying program that infused liquidity into the market.  Because of this, stock markets in Asia fell heavily. The PSE index went down to 6.75% last week, closing at 6,114.08 its biggest single day drop.

IMF Resident Representative, Shanaka Jayanath Peiris, in an interview with the Philippine Star, said that stocks are just “held by a small share of the population” and so, the sell-off may have “limited impact” to over-all consumption.  “Banks are also well capitalized and liquid, and could step in to finance investment plans. Deleveraging from risk assets should thus only have a moderate impact except possibly on a few leveraged corporate reliant on external funding,” he pointed out.

In a report, BPI Asset Management forecasted that foreign investors will continue to pull out money over the next 2 weeks. “Any tightening now of monetary policy will run the risk of derailing the economy’s recovery especially if we take into consideration that fiscal tightening (equivalent to 2% of gross domestic product) will make its full impact by the second half,” it said. But the BPI Asset Management is confident that foreign investors will return to the Philippines owing to its strong economic growth, low inflation and healthy public finances.

The PSE index went down to 6.75% last week, closing at 6,114.08 its biggest single day drop.

The PSE index went down to 6.75% last week, closing at 6,114.08 its biggest single day drop.

GlobalSource Partners, a consultancy agency, echoed the same sentiment of the BPI Asset Management saying that investors will go back to the Philippines. “With the upgrade to investment grade already achieved and no clear further upside play, foreign players appeared to have decided to cash in earnings…,” it’s report said. For the real estate boom, the consultancy also noted that real estate projects of private developers will need 2-3 years to complete their projects while the government’s infrastructure spending spree may only last up to this quarter.

After holding its foot between P40-P42 = $1, the Philippine peso has been falling recently because of the expectations that the US Federal Reserve will soon scale back its stimulus program. If ever the peso turns from bad to worse, Peiris said the central bank has the flexibility to respond to capital outflows. “But there would seem no need for capital flow measures at the current juncture given the comfortable external position and resilient banking system,” he said. The peso is also strongly supported by  $82-billion in reserves to “smoothen excessive volatility.”

IMF mentioned that the financial market sell-offs are expected to have a “moderate impact” on the Philippines, which does not need to resort to controls to prevent capital from leaving.

President Benigno Aquino highlighted the economic success of the Philippines during the World Economic Forum.

President Benigno Aquino highlighted the economic success of the Philippines during the World Economic Forum.

Recently, several reports said that the unemployment rate of the country is higher even the country is experiencing economic boom. Socio-Economic Planning Secretary Aresenio BAlicasan said that the poorest of the poor cant still benefit from the economic growth.

But President Aquino rejected this and maintained that the country is now a rising tiger and that his government will continue its reforms to sustain the economic growth and will need a consistent push to make the growth feel by the masses. He said the reason for the high unemployment rate is due to the agricultural sector wherein the farmers refused to plant during the summer days.

An analyst believes a weaker peso is good for the economy. In an interview with ANC, Jonathan Ravelas, BDO Unibank Chief Market Strategist, said that a weaker peso will be good for the Philippine economy and boost the income of dollar earners. Such example is the dependents of OFWs who continue spend more because they get more pesos from dollar remittances.

He noted that “A weaker peso is in our best interest. First, this will allow competitiveness. Second, we know that our economy is driven by consumer spending and the OFW continues to be main contributor. A weaker peso gives them more purchasing power to buy houses and eventually spend in the economy. Your call centers are the ones taking the office space, which is supporting your real estate and construction sectors.”

Capital outflows from Southeast Asia have increased due to the anticipation that the US Federal Reserve could consider reducing stimulus. Investors pulled $2.1 billion from Asian stocks in the week to June 12, the most since August 2011. But BSP Governor Amando Tetangco said that the country has scope to ease monetary policy to protect growth.

In an interview with Bloomberg, Tetangco said “We have scope to further ease. The benign inflation outlook gives us room to further support growth if this proves to be needed. That said, we’re also mindful of financial-stability implications of keeping interest rates very low for an extended period of time.” He also cited that BSP maintains “a strategic presence” in the foreign-exchange market.

Mr. Ramon Cuervo: "To liquidate a property under pressure is having to be ready to take a loss in the end, especially when taxes and selling expenses take a big bite off your gross sales."

Mr. Ramon Cuervo: “To liquidate a property under pressure is having to be ready to take a loss in the end, especially when taxes and selling expenses take a big bite off your gross sales.”

“What we hope we are able to accomplish is to create a relatively stable foreign-exchange environment where businesses can plan. And looking at the fundamentals, the peso remains supported by positive fundamentals,” he said.

For the real estate sector, my advice is there is a frenzy of making millions in buying foreclosed properties. It may be a good idea, but I have to say, be careful. Be very careful. Interest rate will be going up. And if the amortization payments reach higher levels than our rental income, then trouble will begin.

To liquidate a property under pressure is having to be ready to take a loss in the end, especially when taxes and selling expenses take a big bite off your gross sales.

SOURCES:

  • Business Mirror
  • Business World
  • Philippine Star
  • ABS-CBN News
  • Bloomberg News
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